The UK Pound Falls To Nearly Four-Decade Low Against the US Dollar

British Pound by Christopher Bill Via Unsplash
British Pound by Christopher Bill Via Unsplash

The UK pound plummeted dramatically to a nearly four-decade low against the US dollar on Friday as investors fear the government’s plan to reinforce economic growth will worsen inflation flames.

The pound plunged below $1.10 for the first time in 37 years, falling as much as 3.2% as the currency pair fell to $1.0899. 

The loss was set off after the UK’s new finance minister Kwasi Kwarteng outlined a mini-budget that included the most significant tax cuts since 1972, which will slash taxes by £45 billion by 2026. In aiming for a 2.5% growth trend, the plan includes scrapping a 45% income tax rate on earnings of more than £150,000 a year ($164,000) to keep the rate at 40% and reducing stamp duties paid by homebuyers.

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“If foreign investors lose confidence in the country, its government and economy, which is happening at scale, Sterling could fall much further and the fallout will be devastating. This will keep inflation higher for longer and growth,” Philip Dragoumis director and owner at Thera Wealth Management in a note Friday. 

The Bank of England this week hiked its key interest rate by an additional 50 basis points as it tries to quell increasing inflation. The inflation rate of  9.9% is running at a near four-decade high. 

“The sell-off in UK assets reflects the sheer panic as the new government’s stimulus package will not only grow an already sizeable debt burden, potentially to unmanageable levels, but will also add to inflationary pressures,” wrote Fiona Cincotta, senior financial markets Analyst at City Index. “The BoE, which has been reluctant to hike rates aggressively, will need to roll up its sleeves and fight inflation with larger rate hikes. Expectations for a 1% hike in November are already climbing.” 

UK government bond prices fell, sending yields higher, and the FTSE 100 benchmark equity index lost about 2% on Friday.